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RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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An S-Corp has received a $400,000.00 grant to do medical research.

Customer Question

An S-Corp has received a $400,000.00 grant to do medical research. It is my understanding that the $400,000.00 is taxable less all expenses. Example, the $400,000.00 would be reported as gross income. Then all expenses associated with the research would deducted. Example, expenses total $350,000.00. Net and taxable income would $50,000.00 ($400,000.00 - $350,000.00).

Is that the correct way of reporting on the Form 1120S?
Submitted: 7 years ago.
Category: Tax
Expert:  RD replied 7 years ago.
Is this a federal grant?
Customer: replied 7 years ago.
Expert:  RD replied 7 years ago.
Section 118 of the Internal Revenue Code excludes from gross income contributions to capital. To determine if a government grant is a contribution to capital and hence excluded from gross income, the grants should meet the following requirements-
  • the funds must become a permanent part of the transferee corporation's working capital;
  • the contribution must not be compensation for specific, quantifiable service provided for the government by the transferee corporation;
  • the contribution must be bargained for;
  • the funds transferred must result in benefit to the transferee corporation in an amount commensurate with its value; and
  • the contributed assets will ordinarily be employed in or contribute to the production of income.
Hence, if the grant received by the S Corp meets the above requirement than it is not taxable. Note that any amount spent using this grant will also not be deductible in such cases.

Let me know if you have any question.

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.